Guest Post: Gold's Value Today

Way back in 2009, I remember fielding all manner of questions from people wanting to invest in gold, having seen it spike from its turn-of-the-millennium slump, and worried about the state of the wider financial economy.

A whole swathe of those were from people wanting to invest in exchange traded funds (ETFs). I always and without exception slammed the notion of a gold ETF as being outstandingly awful, and solely for investors who didn’t really understand the modern case for gold — those who believed that gold was a “commodity” with the potential to “do well” in the coming years. People who wanted to push dollars in, and get more dollars out some years later.

2009 was the year when gold ETFs really broke into the mass consciousness:

Yet by 2011 the market had collapsed: people were buying much, much larger quantities of physical bullion and coins, but the popularity of ETFs had greatly slumped.

This is even clearer when the ETF market is expressed as a percentage of the physical market. While in 2009 ETFs looked poised to overtake the market in physical bullion and coins, by 2011 they constituted merely a tenth of the physical market:

So what does this say about gold?

I think it is shouting and screaming one thing: the people are slowly and subtly waking up to gold’s true role.

Gold is not just a store of value; it is not just a unit of account; and it is not just a medium of exchange. It is all of those things, but so are dollars, yen and renminbei.

Counter-party risk is the external risk investments face. The counter-party risk to fiat currency is that the counter-party — in this case the government — will fail to deliver a system where that fiat money will be acceptable as payment for goods and services. The counter-party risk to a bond or a derivative or a swap is that the counter-party will default on their obligations.

Gold — at least the physical form — has negligible counter-party risk. It’s been recognised as valuable for thousands of years.

Counter-party risk is a symptom of dependency. And the global financial system is a paradigm of interdependency: inter-connected leverage, soaring gross derivatives exposure, abstract securitisations.

When everyone in the system owes shedloads of money to everyone else the failure of one can often snowball into the failure of the many.

No asset is safe now. The only choice to hedge risks is to hold hard currency — gold.

So the key difference between physical metal and an ETF product is that an ETF product has counter-party risk. Its custodian could pull a Corzine and run off with your assets. They could be swallowed up by another shadow banking or derivatives collapse. And some ETFs are not even holding any gold at all; they may just be taking your money and buying futures. Unless you read all of the small-print, and then have the ability to comprehensively audit the custodian, you just don’t know.

With gold in your vault or your basement you know what you’re getting. There are other risks, of course — the largest being robbery, alongside the small danger of being sold fake (tungsten-lined) bullion. But the hyper-fragility of the modern banking system, the debt overhang, and the speculative and arbitrage bubbles don’t threaten to wipe you out.

Paper was only ever as good as the person making the promise. But increasingly in this hyper-connected world, paper is only ever as good as the people who owe money to the person making the promise. As we saw in 2008, the innovations of shadow banking and the derivatives system intermesh the balance sheets of companies to a never-before-seen extent. This often means that one failure (like that of Lehman brothers) can trigger a cascade that threatens the entire system. If you’re lucky you’ll get a government bailout, or a payout from a bankruptcy court, but there’s no guarantee of that.

Yes that is interesting. Not even our zinc and steel (in Canada) coins talk about being a NOTE for DEBTS. Could it be that perhaps the metal itself is the asset to extinguish debts? Hmmm.... I wonder how many universities teach these concepts.... Does anyone know why Ben Bernanke, or Timmy Geithner doesn't suggest to the government that revaluing gold could extinguish the debts? Why on earth do they insist on squeezing a rock (us) to milk it of every drop before they just admit that the paper NOTES are worth less and less...

Oh... I get it... they are after the FRUITS OF OUR LABOUR! That's what they want, not gold, they want OUR PRODUCTIVE CAPACITY for themselves.

Exactly. ^ Someone who actually gets it. That is precisely what FRNs and digital fiat are. They are units of your labor. And if you have them they can be used as "Hall Passes" to be exchanged for momentary freedom, or for others toiling on your behalf. Yes they are SLAVE DEEDS. Far more valuable than any shiny metal.

Max Fischer, the only way not to be lost in uncessary convoluted intellectualism is to remember basic truth, immutable true statements. That what people in science do, they start with the obvious. We have an entire school of idiot economists that tell us that you can spend more than you earn and it is ok because there is a convoluted explanation that those who defend it fake to understand ( they rely on faith). The school of economics today ressemble the catholic church organizing lengthy debate to figure out how many angels could stand on the head of a pin. Empirical evidence show that excessive debt lead to ugly corrections and large debasement driven inflation, I urge you to get the data from Kenneth Rogoff, but you will tell us that this time is different I guess because you have a smart explanation? I know some unbelievably bright people in the scientific community, they have NO intellectual arrogance, the concept is foreign to them, they actually have a tendency to be a bit not very self confident. On the opposite I have seen many idiot arrogant lawyers and economists by training full of themselves.

It is of interest that for the last 40 years Nobel prizes in Peace and Economics had nothing to do with either science or truth. For all practical points of view, Nobel Prizes were just propaganda tools used to promote bogus "values" as well as fraudulent and baseless speculations.

The so called New World Order, with the Zionist Central Banking Mafia in control of mass media, political and economic institutions, has used either colonial slavery or wars to promote their agendas. They not only destroyed endless human live and inflicting endless human suffering but also destroyed endless countries and the Western civilization as we know it.

Their arrogance is out of control. It will not only destroy millions of innocent lives but also will destroy the Mafia.

Every organization that matters has been bought or stolen, that simple. Nothing can be believed that they say, nothing can be trusted that they do, these are the purest form of criminals.
When this finally falls apart it is these same people that will be hunted like animals, their money won't save them as the new politicians see that being with the people IS the way to go, this will happen after they realize that horrible death is their only other option - yeah, they'll be rich but also they'll be dead.
It is coming fast and they know it, by the end of the summer (or sooner) we'll be in a global revolution - no where for them to hired but Russia or China - if they'll have them....
A popular bumper sticker some years ago is very applicable: "Kill them all and let God sort them out"...

I have a question, you say "zionist central banking mafia" but I thought the center of all banking was in London.? can you explain, I'm really curious because I hear this phrase often but don't know the genesis of it.

I didn't know China and India had "boots" on the ground and on Naval ships in the Gulf! I thought they just provided serfs in the ME. The oil flows only to the extent that the US/swappable currency countries allow. Period. Anything else would result in some unpleasantness for sure.

Oil is the real hard currency. And the US of A owns in it spades ... in the Middle East.

Comment:

Comments like the one above are being proven to be idiotic much like man caused global warming.

Fact: The US imports more oil from Canada and Mexico, Canada being #1

Additionally, the leftist mantra that the US has only 2% (proven reserves) of the world's oil but uses 20% plus is currently under debate and if is premature to say where the US stands on oil reserves. However, it is clear, that the US has more oil then the 2% because of new technologies and discoveries such as oil shale. We also have an abundance of natural gas. Quite frankly, I have no problem using other countries resources that they are willing to sell to us. Later down the road, it is those same foriegn countries that may be energy dependent on the US.

Maybe. I have high hopes for my gold. But when everyone finally realises what a scam Keynesian econ really is, i think the signed first edition first print copies of Hayek and Rothbard I have will be worth a lot more than my gold.

In 1870 gold was $20 an ounce and $20 would buy you a good suit of clothes. 20 ounces ($400) would buy you a horse and buggy and 200 ounces ( $4000) would buy a farm.

In 1940 gold was $35 an ounce and $35 would buy you a good suit of clothes. 20 ounces ($700) would buy a new Chevrolet and 200 ounces ($7000) would buy a farm.

In 2012 gold is $1600 an ounce and $1600 will buy you a good suit of clothes. 20 ounces ($32000) will buy you a new Chevrolet and 200 ounces ($320,000) will buy a farm.

100 years from now who knows how many "dollars" an ounce of gold will be "worth" or if we will even be using dollars. But I bet an ounce of gold will still buy a good suit of clothes, 20 ounces will buy a new car, or possibly a jet propelled space ship, and 200 ounces will buy a farm.

I see you are still disingenuously trying to beat that 1980 gold price spike dead horse.

Isn't it rather pulpy by now?

Yes, it is true that, contrary to the poster's claim above, the value of gold DOES change over time --- but that is largely a reflection of the changing perceptions of the value of our government-controlled fiat currencies, and the ever-changing levels of trust in our corrupt and failing financial and monetary systems, rather than anything inherent in gold itself. Was not a seat in a lifeboat on the Titanic worth vastly more after the ship hit the iceberg, rather than before?

Nevertheless, it is specious and outright dishonest to try to denigrate the worth of holding gold based on a one-time and BRIEF price spike over 30 years ago. The simple fact is, vanishingly few ever bought gold at or anywhere near that transient price spike, so your argument is nothing but cherry-picking taken to the ultimate, and disingenuous, extreme. For that I spit on you.

I just told you the price of gold does not change. The price of dollars changes. There are times when the gold/dollar relationship gets out of whack. Just like there are times when stocks are overpriced/underpriced in relation to value. But there is an equilibrium point and over time the market has a strong tendency to correct.

To put it another way, 1980 and 2008 tell you more about the value of paper and the state of the economy than the value of gold. Get used to looking at value in terms of gold, not paper, and a lot of things become clear.

This also means if you are looking forward to the day when gold is worth $1,000,000 an ounce so you can buy a mansion for one ounce of gold you are bound to be disappointed.

Gold may well be worth $1,000,000 an ounce some day. But when that day comes, a good suit will cost $1,000,000, a new car $20,000,000 and a farm $200,000,000. And someone who put away an ounce of gold in 2012 will be better off than someone who put away $1600 in cash.

But at that stage with a high fiat price will be indicative the currency is dead, so there would be little point exchanging your gold at that time. It would be better to exchange your gold directly for hard assets during the chaos (skip the fiat swap in case fiat goes to zero) or wait to see a new currency formed and then convert some of your gold holdings.

I'm a little worried about the other side with gold too... who is going to buy it when its SUPER expensive and I need to sell? I guess I just need to never 'need' to sell...

Comment:

Actually, you may be using your PM as a currency itself. For example, I need some work done, I have some american eagles that I will trade you for your services. I need food, will you take my silver eagle in exchange for this amount of food. etc.

I'll agree that things would be pretty bad at that point, BUT... it's going to get bad any way that you look at it.

If there's a surplus of food available then yes, one could use gold to obtain it. Price is likely going to be very high for many, and the REAL protection is to be able to grow your own food (to some degree): this is the case in ALL of human history; our modern area is a complete distortion.

In Zimbabwe, people had to go into the hills and dig or pan for gold and diamonds to buy food during the end, after people stopped accepting $5 trillion bills and Germany wouldn't sell any more paper or ink for printing higher denominations.

I do have problems with comsistemcy... last month I had to get some dental work done and could only get 20 oz pf silver, and months when property taxes are due I generally can't afford anything. At least two or three more months a year I get hammered woth unexpected bills.

That'd be an awesome amount of disicipline, considering that's my entire take-home pay, and I have to support a family of five with it.

It's not always about disicipline- and don't give me any crap about being lazy or picking the wrong trade, I'm an aerospace engineer. Being younger and living in a less populated area should not be an automatic sentance.

Those of us in my position get to ride the devil's metal, but at least we've got that- I'm just tired of the gold bugs looking down thier noses at the silver bugs. It's like arguing over vanilla and chocolate- either way, we're all eating ice cream. Better than storing wealth in commemorative Budweiser and Nascar mirrors, which seems to be the most common strategy in my neck of the woods.

Have you addressed AKAK or Diogenes response to your ignorant comments regarding the value of gold in any time period or are you going to ignore your fallacious remarks as if they weren't made? Either tap out by admitting your error or continue fighting. This is fight club, not run away club.

You have to add one more thing, Fiat Currency has a flag behind, the central bank of the country where it is printed, so you have to trust this country. But Gold has no Flag, it is accepted as a currency in all countries.

I think we are missing the point. The USD has oil behind it. As long as other countries are unwilling or unable to break the USD hegemony of oil, the USD is safe. And the only way to break that hegemony would be war -- at that point, nothing matters. Keep stacking but it won't do you any good -- if the system is going down, the PTB has no choice but to take down everything... Instead just enjoy life !

As long as other countries are unwilling or unable to break the USD hegemony of oil, the USD is safe.

CommentL:

And that ZH's is why Iran really has sanctions against it - because they are trying to exchange their oil for goods and currencies not in US dollars. Oh yea, other nations are making similar deals, China with Russia anyone? Been done. Right now, the trouble with Euroland is what is helping to keep the dollar as the reserve. But all roads come to an end.

I clearly stated last week/ go long aud/everything! Those weirdo Canadian bugs make me laugh! Is the Canadian dollar pegged to U.S. equity markets? Oh I get it. QE makes the usd/cad trade go parabolic, when all the cash goes to emerging markets!

very confused by these alleged statistics. the # of shares outstanding in the GLD (the largest ETF) are actually UP since 2009, so unless there is suddenly seven times more physical gold above ground (which there is most certainly not), it is non-sensical to say that the "% of the market" represented by ETFs has dropped from 75% to 10%. the market for PM ETFs has most certainly not "collapsed."

not sure why it is a good thing if all of a sudden people are flipping/trading their physical gold more often, which seems to be the only statistic this article is based on.

First and maybe most important, China announced that they will purchase oil from Iran and will pay in Gold.

This follows the same type of arrangement announced by India a couple of weeks ago. THIS is a very big "in your face" to the western world's SWIFT transfer and settlement system. No matter how you look at it, this is Dollar negative and further proof that Dollar demand will drop as the world distances itself from the use of Dollars.

Economic numbers out of Euroland have turned decidedly weak as Britain looks toward the double dip abyss and Spain is rapidly "sliding" down the Greece'd totem pole towards bailouts. Spain however is no Greece by a long shot, they are "Greece squared" or maybe cubed because they are so much bigger and their banks are suffocating on home loans where the collateral has collapsed. The European sovereigns are doing the exact same things as are the Fed and Treasury, whatever you want to call it, the bottom line is plain and simple monetization. The Fed already is the largest buyers of Treasury bonds, it is only a matter of time before they become the ONLY buyer.

Same story in Europe where the ESM, EFSF and other "programs" (funded also in a big way by out wonderful Federal Reserve providing "currency swaps") provide "liquidity" to the banks who in turn buy sovereign debt. It is one big merry go round of Ponzi laid upon Ponzi that is already obvious. It is just a matter of time before it becomes "obvious enough" for Jane and John Doe to see, realize and understand.

A week ago several announcements from the IMF, BIS and World Bank regarding levels of and use of Gold as "money" (maybe Ben Bernanke read these?), preparations are being made. Russia and China are doing cross border deals that exclude the Dollar. Both India and China are doing deals directly with Iran for oil. Asian nations have made multiple trade deals amongst themselves. Germany has made individual deals with Russia over natural gas, again without using Dollars. While all this is happening, the U.S. in it's ultimate wisdom has continued to push the ignorance that "SWIFT" isolation is some sort of punishment through isolation. When all is said and done, the only one "isolated" will be the U.S. and with a currency that will no longer "spend".

Yes, these preparations are being made across the globe for their own protection and so that the Western IMF and World Bank can say "we told you so" or "you were warned". Since 2008 the mathematics to this equation are what? Jim Sinclair warns that "Gold could gap up to $3,000" which is another way of saying that FIAT Dollars would be "devalued" by roughly 50 %. Whether he is correct and we first get a "mini devaluation" or whether it is the big enchilada where a "0" or two gets added to Gold's fiat price no one knows. Jim has not been an "alarmist" in the past and Mother Nature is screaming revaluation at the top of her lungs.

Devaluation plans behind the scenes are being discussed and probably better than 50/50 already decided on.

Remember, a "bank holiday" is the same thing as the music stopping in a game of musical chairs. Once the music stops you will not be afforded the chance to re-position yourself in any way shape or form.

Is this Gold-for-Oil deal allegedly struck by China and India confirmed? I think it is all posturing and geopolitical negotiations. I would be more worried about Food-for-Oil barter deals. What is the use of a useless metal to Iran?

If Gold was such a great asset, India should be the richest country instead a being a dump. The truth is that food-energy-defence security are the real determinants of countries wealth and well-being -- on these three dimensions, USA is still the king.

Truth is, gold is in a severe PR slump- we're all looking at fundimentals and saying it's vastly undervalued. The thing is, even though the nominal price has increased dramatically, that still doesn't mean that it's magic all by itself. When the Western countries start screaming for gold, then India might get a taste if they're willing to sell it for tangible goods- but as long as it sits idle, it doesn't matter what it's worth, you're still dependant on your infrastructure.

Right now, if you were to go sell your gold and silver you'd feel like an Indian too, when the coin shop gives you 85% of the spot price, or the jeweler gives you 60%. Metal isn't winning until it's a widely accepted currency again- until then, most of the retail outlets for selling it are little better than pawn shops.

** I'm going to add the exception here for selling to some of the more reputable dealers like APMEX and Gainesville, who actually do offer something at or above spot much of the time- still less then their premium, but relatively fair.

Since the defecation of Trav Beavis and MathMan, we need a new Paper-Bug anti PM troll. Would you be willing to step up and be the resident retard of the board? You will need to make alarmist pro-ponzi posts about gold's imminent "collapse."

If Gold was such a great asset, India should be the richest country instead a being a dump

Right, and if it wasn't for customs over centuries they could be.Its a symbol of wealth and prosperity there,always has been always will be.

Their gvt, and banks have over 18,000 metric tons.That is equal to EVERY other nations holdings on the planet,( at the printing of last stats) now add the populations jewelry, and stashes....................likely nearly as much...............

So my $ is on India having close to 40 thousand metric tons of gold (not counting silver).

"The problem we have though is that the bulk of the people don't understand gold unless it's part of a pirate story."

This is one of the subtle layers of propaganda. This is how it all works.. Why have TPTB programmed this story? I have a theory on how this goes down:

Confiscation (ouch!) occurs. Individuals known to have physical will be pressured by the programmed masses to turn it over (narc on your neighbor- he/she is the one who is responsible for your "poverty" by "hording" PMs). The big holders, however, the banks, will gladly do as they are part of the scheme and they know that they will get the gold back (it's only on loan in order to help reset everything). Masses conditioned to help TPTB maintain their power, same as it ever was, same as it ever was...

Obviously someone doesn't understand this... I'm the fucking messenger, I'm NOT advocating confiscation! Ask yourself this: if you were TPTB what do you think that you would do? They have NO choice other than to control PMs, otherwise they lose control of EVERYTHING. Of course, whether a given strategy can derive the desired results is a whole nother story.

Again, who are TPTB going to turn to? THEY are incapable of doing for themselves. People like here on ZH ain't going to help them. So... again, it's not all that hard to see what they see as being their only POSSIBLE (not saying probable) way out.

No, fiat currency is not storing value, only representing value. Storing value means that the material itself has to have enough perceived value. Printed paper bills have no value, they are only representing whatever number is printed on them. If the system collapses, all value represented is lost. So not storage there.

People need to understand that the meaning of money is completely different from the meaning of fiat currency. Currency is never money, only a government approved representation of value.

I'm not even sure they even represent 'value' - they represent confidence - each note is a vote of confidence (or otherwise) in the issuing body (govt.)

My confidence that the cabal that control our politico-economic system have my best interests at heart is in an inverse realtionship to my PM holdings - had they not fallen out of my boat, fishing, recently, that is.